A Guide to Joint Ventures in Mexico

During the 1980s, Mexico and other Latin American countries were facing tremendous political turmoil and economic devastation as investors fled to pursue other opportunities, primarily in Asia. Today, Mexico is increasingly opening up their trade and is becoming a gateway for entering Latin American markets. In addition, although the recent conclusion of the North American Free Trade Agreement (NAFTA) was not anticipated earlier in the year, the proposed agreement, if adopted, should significantly boost Mexican economy and open trade with the United States in many industries.

This study attempts to provide a comprehensive review of current socio-political changes in Mexican markets and their impacts on U.S.-Mexican joint ventures. Furthermore, because the Mexican government, under President Carlos Salinas de Gortari, has encouraged investment in Mexico by increasing the percentage of a Mexican business that a U.S. firm can own, joint ventures may be more attractive now than in the past. Therefore, the objective of this study is twofold: (1) to explore the market opportunities for U.S. products in Mexico through the use of joint ventures; (2) to study the impacts of current political and economic climate as well as the proposed NAFTA on forming a joint venture with a Mexican company.

THE MEXICAN MARKET

Opportunities for investment in Mexico abound for three reasons. First, under the strong leadership of President Salinas, the political situation in Mexico has stabilized in this, the fourth year of his six-year term. With the next election only two years away, Salinas hopes his ambitious Solidarity economic reform program will improve the economy sufficiently to convince voters to support his party once again. While it is not yet clear whom he will select to succeed himself in the next election, it appears that he has at least three skilled politicians to choose from, including Finance Secretary Pedro Aspe Armella, Social Development Secretary Luis Donaldo Colosio, and Mexico City Mayor Manuel Camacho Solis. In any case, Salinas is determined to leave behind a legacy of stability in the political arena (Smith 1993).

Second, and more important, the economic situation in is starting to stabilize as well. Despite the $21 billion trade deficit and a sluggish 2.8% growth rate last year, there are many encouraging signs pointing to a bright future. While inflation is still in double digits, it is not running out of control as was the case when Salinas first took office. In fact, his goal is to push inflation below 10% in 1993 (Smith 1993).

Third, privatization has become the norm in both industry and agriculture. More than 1,000 government-owned firms have been privatized, and the movement has spread into the banking and oil industries as well. Also, from 1988 to 1990, Mexico went from a budget deficit of 7% (of Gross Domestic Products[GDP]) to a 7% surplus, and it ranks as one of the leaders in Latin America in GDP per capita at $2,485 (Martinez, Quelch & Ganitsky 1992).

Given all these factors, we believe that the opportunities for U.S. firms to enter into joint ventures with the Mexican companies in order to penetrate the Mexican market are unprecedented. While the future is never crystal clear, many indicators, both political and economic, suggest that Mexico is the harbinger of continued economic progress in Latin America. Mexico's size and proximity make it an ideal springboard into the entire Latin American marketplace. In addition to sharing a 2,000 mile border with the United States, the U.S. Embassy estimates that two-thirds of Mexico's foreign investment (approximately $7.1 billion) is from the United States (OBA/BIAD 1990). Mexico is the 14th largest country in the world and has the 12th largest population.

Mexico's economic climate has been improving. The Mexican government has instituted stringent fiscal policies to control wages, prices, and exchange rates. The government has reduced inflation, and experts predict a further reduction in the future. …

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